The beauty of most real estate assets is they tend to rise in value over time. That doesn't mean they don't rise and fall in the short term. The question, of course, is why?

At first glance, the real estate market looks fairly complex given all the various factors that can go into it. At this time, the big scare is the foreclosure market. Many fear that lenders have written too many loans to people that cannot really afford them. If many of these people default on their loans, the real estate market could see falling prices as foreclosed homes start to saturate it. Many feel this is already occurring.

Foreclosures are just one factor for real estate prices, but they detail the effect even one change can have on the market. Others can include things such as the availability of money for buyers [you need it to spend it], the time of the year [how many people are going to drive around shopping for a home in the middle of December in Chicago?] to a variety of other issues. Even considering these initial issues, one might think you need to be an economist to get a handle on the market. You don't.

At its core, a real estate market is really about inventory. Yes, inventory like you see in a store. If there is too much inventory available, prices fall. If there is not enough, prices tend to go up. To picture this concept, let's look at analogy to the automotive industry.

Ferrari is a high end auto manufacturer. The company only makes two to three hundred cars a year. This means there is little inventory available. This lack of inventory translates to prices in the hundreds of thousands of dollars. Can the company get people to pay that much? Oh, yes. There is a waiting list for the cars and the value of each goes up immediately upon purchase because there are so few available.

In contrast, the large Asian and American manufacturers mass produce cars. They build thousands of them a year. Because they can mass produce them, there is usually plenty of inventory. Their goal is to make a profit on the volume of sales, not the margin on a single car. This lowers the price of the cars as a whole since you, I or anyone can pretty much walk down to the local dealer and buy something today. This is hardly possible with a Ferrari! If the manufacturer finds sales are slow, it wants to avoid the cost of carrying a large inventory of cars. As a result, you will see low interest or no interest financing options.

Real estate prices tend to fall or rise based on the same concept. If there are fewer homes on the market than there are interest buyers, prices go up. If there are a lot of homes on the market and relatively few buyers, prices fall. There are obviously other factors that can be involved, but this is the general methodology for determining market prices.

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